What goes up doesn’t necessarily come down.
That’s contrary to the sentiment of a surprisingly large proportion of respondents to the Bank of Canada’s quarterly consumer expectations survey, released last week.
According to the survey, more than a quarter of Canadians believe that current decades-high prices will drop five years from now.
“What goes up must come down,” said one respondent in a post-survey interview.
The sentiment likely raised eyebrows at the central bank.
The chance of deflation in five years is “extremely unlikely,” said Laval University economics professor Stephen Gordon.
Though some prices will come down, as has been the case with gasoline prices, Gordon said higher prices for goods feed into each other through the supply chain and become baked into the economy.
“It starts getting embedded into people’s expectations and it becomes a self-fulfilling prophecy,” he said.
Meanwhile, the Bank of Canada said confusion between deflation (falling prices) and disinflation (slowing price growth) wasn’t the reason the figure was so high, noting that its survey respondents understood the difference.
The central bank regularly monitors inflation expectations in the economy to make sure it has control over price growth. With inflation running well above its two per cent target, inflation expectations have been a top concern for the Bank of Canada.
If people and firms expect inflation to remain high in the future, that expectation can lead to businesses setting prices higher and workers asking for higher wages.
Normally, people expect deflation when the economy isn’t doing well. However, the Bank of Canada pointed out that respondents who said they are anticipating deflation were less likely than other Canadians to expect a recession in the next twelve months.
Instead, these respondents were more likely to believe that inflation was caused by supply chain disruptions. Once these temporary pressures on inflation fade, many of them believe prices that rose rapidly would then decline.
Although TD director of economics James Orlando agrees that deflation is unlikely on the horizon, he said there is logic behind what these respondents are thinking.
“As supply chains ease, and they’re easing very quickly right now, we’re going to start getting more and more discounting,” Orlando said.
Consumer price index data shows prices for some goods have already been falling in recent months.
The prices of durable goods for example, which includes products like furniture, fell between November and December.
However, that doesn’t mean the economy will experience broad-based deflation, Orlando said.
“The reason why we don’t think total inflation is going to be sustained in a negative territory … is because you got to consider that the economy isn’t just goods, but it’s also services,” he said.
Prices for services are driven by wages, he said, which are unlikely to fall given their sticky nature.
Though deflation may sound like good news on face value, Gordon said it isn’t something anyone should be wishing for.
“Business would have to be in really bad condition for firms to be cutting their prices. And if they’re in that situation, they’re probably cutting workers,” he said.
Similarly to high inflation, deflation would also set alarm bells off at the central bank. Orlando said Canada’s economic system expects there to be some inflation and has that built into expectations. It’s
If prices were to begin falling, that would force the Bank of Canada to jump in and stabilize prices.
For now, the central bank’s worries are far-removed from fears of deflation.
Canada’s annual inflation rate was 6.3 per cent in December, a noticeable improvement from the month prior but still too high for the Bank of Canada’s comfort.
Though some Canadians appear to believe prices will repair themselves, the Bank of Canada isn’t counting on it as it gears up for one more — and potentially final — interest rate increase on Wednesday.
